Wen | Wang Yinggui School of Finance, City University of Macau

A survey by the Bank for International Settlements shows that global central banks are paying more and more attention to central bank digital currencies, and some have entered the stage of actual operation. According to the results of a survey conducted by the Bank for International Settlements in January 2021, 86% of banks are discussing the advantages and disadvantages of central bank digital currencies, 60% are conducting experiments or proof-of-concepts, and 14% are entering the development and testing phase.

In the first quarter of 2021, the Bank for International Settlements once again issued a questionnaire survey on central bank digital currencies to 50 central banks. The results of the report released on June 11 showed that about two-thirds of central banks are conducting trials or tests, and more than half of central banks It is believed that improving the efficiency of cross-border payment is one of the main reasons for the development of central bank digital currency. Recently, Fed Chairman Powell stated that the Fed will publish research papers on the advantages and risks of U.S. central bank digital currencies later this year.

Traditional electronic money has many shortcomings, and central bank digital money must be used to meet the demand for precise monetary policy operations in the digital age.

Quantitative easing monetary policy is in trouble

Quantitative easing monetary policy has become a magic weapon sacrificed by the central banks of major countries. It seems that as long as interest rate cuts (even negative interest rates) and market liquidity are increased, the policy goals of promoting growth and ensuring employment can be achieved.

The Bank of Japan (the Central Bank of Japan) is the first company in the world to implement quantitative easing monetary policy. It has a history of more than 20 years since 1998. After several rounds of quantitative easing policies, the Bank of Japan interest rate is currently negative, among which the policy short-term interest rate is- 0.1%, deposit interest rate is -0.12%, inter-bank lending rate is -0.09%, and 10-year treasury bond yield is -0.015%. However, the “sweeping flood” easing did not save Japan’s economic slump.

There is always a big misunderstanding in economics: low interest rates will stimulate corporate investment and personal consumption, but economic reality is not the case.

Customer deposits in the U.S. banking industry reached US$17.09 trillion, and loans grew slowly (see Table 1). Personal consumption accounts for more than 68% of the U.S. economy, but U.S. households have not increased bank loans due to ultra-low interest rates; corporate investment spending is relatively active, but companies have sufficient funds, or they can directly finance from the market through the issuance of stocks and bonds , The dependence on bank loans is low, and the loan balance has not changed much. Since 1973, the average bank loan-to-deposit ratio (the ratio of loans to deposits) was 82.7%, and it was only as low as 60.53% on June 2, which was a record low. Personal consumption is sluggish, industrial and commercial loans are not prosperous, and the commercial bank transmission channel of the Federal Reserve’s monetary policy is blocked, and the policy effect is difficult to give full play to.

2/3全球央行正在试验或测试,详述央行数字货币的六大优势 (Source: St. Louis Branch of the Federal Reserve Bank)

The shortcomings of traditional currencies have become more prominent in the digital age. The Federal Reserve’s quantitative easing monetary policy has led to excess liquidity, increased inflationary pressure, and a significant decline in the influence of the real economy. The monetary policy lacks precision, and policymakers are prone to misunderstandings and judgments. .

Under the traditional currency model, the central bank is like finding its way in the dark, and making mistakes is inevitable. Throughout the decades of history of the world economic crisis, the central bank’s monetary policy operation errors should be held accountable, and the quantitative easing policy has not fundamentally solved the problem of economic development. It can be seen that the rise of digital currency is not accidental.

The central bank’s digital currency and the precise operation of monetary policy

The development of the digital economy has given birth to innovative currencies. According to the “White Paper on China’s Digital Economy Development”, my country’s digital economy accounted for 36.2% of the total national economy in 2019, and its proportion rose to 39.2% in 2020. According to a report by the Bureau of Economic Analysis of the U.S. Department of Commerce, the digital economy accounted for 9% of GDP in 2018, and the average growth rate from 2006 to 2018 reached 6.8%, far exceeding the 1.7% average growth rate of the U.S. economy. The rapid development of cryptocurrencies and stable currencies (such as USDT, DIEM, etc.) has intensified the competition in the blockchain payment space, prompting global central banks to research and develop central bank digital currencies to meet the operational needs of monetary policy in the digital economy.

Human currency forms have experienced commodity currency, debt certificates, metal currency, paper currency, plastic currency (electronic currency) and digital currency. In the long course of history, the basic functions of currency (value scale, means of circulation, and means of storage) have never changed, but transaction costs and efficiency have continued to increase.

In addition to near-field communication (payment can be completed with the touch of a mobile phone), digital currency has many other advantages.

First of all, digital currency does not require production, storage or transportation, and is directly deposited into a designated account after issuance.

Second, digital currency can better monitor currency circulation. The central bank’s digital currency tokens have a standardized structure, including customer identity, transaction value, issuer, holder and other information. The system will be updated immediately after each transaction and stored in the unified registration center managed by the central bank. The central bank only needs to withdraw the token. The information of the currency can understand the transaction details.

Third, the central bank’s digital currency empowers the central bank to implement monetary policy more accurately. Through digital currencies and smart contracts (programmability and atomic settlement), the central bank can pre-set the time conditions for the activation of digital currencies, thereby solving the timeliness of the monetary policy transmission mechanism; setting the interest rate conditions for the activation of digital currencies to Ensure the impact of policy interest rates on actual borrowing rates; or set borrower restrictions (such as small and medium-sized enterprises) to ensure that credit serves special groups and better serve the real economy; or better manage digital currencies based on economic conditions, banks When returning the digital currency, the central bank can determine the interest rate level applicable to the redemption according to the economic situation.

Fourth, better implement the negative interest rate monetary policy. At present, the negative interest rate policies implemented by many central banks are limited to the statutory and excess reserves of commercial banks’ deposits in the central bank, and do not affect the interest rate of personal deposits. The central bank can impose negative interest rates on the digital currencies held by households and businesses to encourage them to consume and invest, thereby stimulating economic growth.

Fifth, improve the efficiency of open market operations and inter-bank transactions. Digital currency settlement time is short, has better traceability and longer time window (24X365, all-weather), so it has more advantages than traditional electronic payment.

Finally, reduce liquidity risks in times of crisis. The central bank can provide commercial banks with more digital currencies through negative interest rates, increased transaction costs, and digital currency discount services to meet market demand for digital currencies.

The development prospects of central bank digital currency

The digital economy is surging and is leading the global digital transformation. It is difficult for traditional currencies to adapt to the requirements of the digital age. Encrypted currencies, stable currencies and central bank digital currencies have made the payment space more crowded, all wanting to seize the opportunity in the digital economy.

Like other developed countries, the domestic payment system in the United States is quite developed and its enthusiasm for central bank digital currencies is not high, but its attitude has changed recently. The Fed’s current monetary policy operation problem is also a thorny issue for global central banks, because commercial banks are one of the important channels for monetary policy transmission mechanisms. A large amount of liquidity lies in bank accounts or is deposited in central banks with excess reserves, deposits and loans The decline in the ratio leads to a loss of efficiency of monetary policy. Due to the lack of transparency in currency circulation, the central bank cannot know the specific flow of currency and transaction data, and the lack of real-time data to support decision-making, the quality and timing of decision-making are in doubt. Even if inflationary pressures increase and liquidity floods, the Fed still refuses to adjust its monetary policy. Is it to please the current president and Wall Street, or is it a decision after calm analysis and consideration? Is the delay in raising interest rates due to political cycles or economic cycles?

The ultra-low interest rate environment seriously damages the economic interests of retirement funds, because the financial goals of employees are relatively easy to achieve under the normal interest rate environment, but employees must invest more in the ultra-low interest rate environment, which limits consumption during the life cycle Ability, the 60/40 investment rule (60% investment in high-risk, high-yield assets, 40% investment in low-risk, low-yield assets) has long been broken, leading to a concentration of risks in the financial market. The return of interest rates to normal levels is a reasonable requirement of the economy and society. At the same time, due to the hegemony of the U.S. dollar, the Fed’s monetary policy adjustments will inevitably cause significant harm to emerging market economies. The depreciation of the local currency against the U.S. dollar, capital outflows, decline in exports, and domestic economic shrinkage are repeated.

In the digital age, the economic cost of traditional currencies is higher. According to estimates by the U.S. Treasury Department, approximately $500 billion in cash (60% of the total) is circulating outside the United States. In addition, high-cost and low-efficiency cross-border payments are still a major pain point for customers. With the increasing popularity of blockchain technology, which currency can support the payment and settlement of smart contracts?

Central bank currency has the status of legal tender, and central bank digital currency should naturally become the digital currency of choice. Due to the advantages of convenient settlement, low issuance cost, and good traceability, the central bank’s digital currency will surely become a weapon for the central bank to accurately operate its monetary policy, and adjust the money supply level and interest rate structure in a timely manner through the flexible issuance and recovery of digital currency.

The biggest regret in the development of the Internet is the failure to solve the problem of online payment currency. Nowadays, multiple currency options must promote the rapid development of the digital economy. The People’s Bank of China’s central bank digital currency is in a leading position in the world. The current level of digital currency development is like the Internet in 1992, and a better prospect is worth looking forward to.